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BRK Valuation


Mephistopheles
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BRK Market Cap: $440 B

- Stock Portfolio: $230

- BNSF: $100 (using UNP as a proxy)

- Cash: $130

 

Call it even at zero.

 

Utilities, Insurance, everything else = free

 

How large of a COVID hit to the cash pile are we looking at in terms of insurance and operating losses?

 

The cash and the utilities serve as a nice hedge in a recession or bear market.

 

I'm thinking of putting a ton of money into this with leverage... So tempting

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I agree it looks enticing but it has done so for months now. WB missed an opportunity back in Mar/Apr. I have added at points under 180 over the last 1-2 months, but for those reasons I am hesitant to commit a lot of capital. Although I do own some LEAPs, but BRK is about a 10-12% position.

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I'm not saying it isnt cheap (and I'm long) but if you count the equities you are implicitly including a bunch of the value of the insurance. There were over $160 B in liabilities related to the insurance operation last quarter. I get the concept of float, but I think treating that as equity (vs a long term cheap loan) is an aggressive way to think about it.

 

If you wanted to sell the insurance cos without their financial assets but with their policy liabilities, you'd be sending a bunch of money out the door to get someone to take them.

 

 

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thank you for starting this topic - this is the cheapest BRK has been in a VERY LONG TIME.  Trading below 1.2x BV.  Operating Biz will likely earn $23-$24B this year as well... also think about Apple... Berk is up $50B+ in Apple -- it is now basically 21% of Berk. 

 

A simple way to value Berk = Operating Income + Investments + Cash ... throw a below market multiple on the N.I, and you can see how cheap it is here.  You can do things like SOTP etc - but that is a bit more complex and in the weeds IMHO

 

What is the catalyst to drive value higher?? 

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I'm not saying it isnt cheap (and I'm long) but if you count the equities you are implicitly including a bunch of the value of the insurance. There were over $160 B in liabilities related to the insurance operation last quarter. I get the concept of float, but I think treating that as equity (vs a long term cheap loan) is an aggressive way to think about it.

 

If you wanted to sell the insurance cos without their financial assets but with their policy liabilities, you'd be sending a bunch of money out the door to get someone to take them.

 

Good point. Buffett himself says that if you include the equities in your intrinsic value calculation, you do not include any value for the insurance companies.

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I don’t know who said it some weeks ago.

But a comparison was made with MSFT in Ballmer era and how after ValueAct got in with a more aligned BoD things start to look differently.

 

I kind of agree with that. To be clear, In no way is Buffet is comparable to Ballmer but I agree that ‘hidden value’ can only by unearthed by the next management. Wether is implementing Precision Scheduling on BNSF or deploy some of the cash.

 

My investment in BRK is really based on what next management will do and am just buying is close to book now .... while dealing with the pain of going sideways for some more years. And I am ok with whatever Buffet does in the meantime.

 

I think that a low risk proposition.

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Thanks bizaro86, I agree you have to subtract the insurance float in the valuation above. These are assets that belong to insurance premium payers.

 

This is similar to if you were valuing a bank, you wouldn’t count all of depositor’s cash in the valuation. Those are assets held for depositors.

 

True, Buffet gets to invest these assets similar to how a bank that gets to lend out the deposits. However, if there are big loan losses banks have to still make depositors whole. Also, if Buffett has big investment losses, he has to still make insurance premium payers whole.

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I don’t know who said it some weeks ago.

But a comparison was made with MSFT in Ballmer era and how after ValueAct got in with a more aligned BoD things start to look differently.

 

I kind of agree with that. To be clear, In no way is Buffet is comparable to Ballmer but I agree that ‘hidden value’ can only by unearthed by the next management. Wether is implementing Precision Scheduling on BNSF or deploy some of the cash.

 

My investment in BRK is really based on what next management will do and am just buying is close to book now .... while dealing with the pain of going sideways for some more years. And I am ok with whatever Buffet does in the meantime.

 

I think that a low risk proposition.

 

+1 I think WB's involvement is irrelevant moving forward especially if you're relatively young and holding long.

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Sorry for the dumb mistake. It was late and I was lazy on my phone just doing some basic math. Ok so say the value of the stock portfolio is the value of the insurance operation. You're still getting the utility and everything else ex-bnsf free.

 

BRK has options that go to 06/2022, 2 years out, and don't have much of a volatility premium. I own some $200s, but this may be a good way to play with leverage.

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I don’t know who said it some weeks ago.

But a comparison was made with MSFT in Ballmer era and how after ValueAct got in with a more aligned BoD things start to look differently.

 

I kind of agree with that. To be clear, In no way is Buffet is comparable to Ballmer but I agree that ‘hidden value’ can only by unearthed by the next management. Wether is implementing Precision Scheduling on BNSF or deploy some of the cash.

 

My investment in BRK is really based on what next management will do and am just buying is close to book now .... while dealing with the pain of going sideways for some more years. And I am ok with whatever Buffet does in the meantime.

 

I think that a low risk proposition.

 

+1 I think WB's involvement is irrelevant moving forward especially if you're relatively young and holding long.

 

Cheers !

I am very close 40, so not that young.

 

BRK is one massive call option with no expiry.

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My investment in BRK is really based on what next management will do and am just buying is close to book now .... while dealing with the pain of going sideways for some more years. And I am ok with whatever Buffet does in the meantime.

 

For those holding Berkshire with the above statement in mind---I think this is a little naive.  There has been limited communication that Buffett will step down anytime soon.  I think it's possible he is in charge another 5-7 years. Buffett clearly feels he has earned the right to continue running the show even if he is no longer the best man for the job.  This seems akin to owners giving loyal players big contracts at the end of their career-ala Lakers with Kobe Bryant in 2013.  Except in this case Buffett is both owner and operator. 

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I am ok for holding for the next 10 years with Buffet and another 15 years without him. 

That is why I called it one giant call option that one can buy today at fair or below fair price.

 

And I don’t really care much about any succession communication from Omaha.

When it happens it will be sudden and he won’t telegraph it I think. If he doesn’t telegraph his investments and buybacks, he won’t telegraph anything tangible related to succession.

 

All I am saying that “juice” wont be extracted in Buffet era

 

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For those mentioning precision railroading post WEB, you're assuming the BNSF management wanted to implement it but Buffett stopped them? I am having trouble believing that because Buffett is generally very hands off. So why would he get involved for this?

 

Maybe BNSF has a better reason not to do it, or maybe they wanted to wait it out to see how it affects customers in the rest of the industry?

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My investment in BRK is really based on what next management will do and am just buying is close to book now .... while dealing with the pain of going sideways for some more years. And I am ok with whatever Buffet does in the meantime.

 

For those holding Berkshire with the above statement in mind---I think this is a little naive.  There has been limited communication that Buffett will step down anytime soon.  I think it's possible he is in charge another 5-7 years. Buffett clearly feels he has earned the right to continue running the show even if he is no longer the best man for the job.  This seems akin to owners giving loyal players big contracts at the end of their career-ala Lakers with Kobe Bryant in 2013.  Except in this case Buffett is both owner and operator.

 

WB is going to be 90 in a few months...I don't think it's naive to think with some degree of certainty that he won't be the head of Berkshire Hathaway sometime in the near future. That being said, I have no problem with him. The man is skilled and has definitely earned his championship rings. I'm just saying (as someone in their late 20's) that I don't really care what WB does in the next few years because 1.) I trust him that if he does anything it will be on the conservative side and is likely to not impair the conglomerate in any significant manner. 2.) like X said above...an under performance in the short term is insignificant to me in the long term. 3.) If one and two are both true then this provides me a few more years to accumulate shares are cheap prices.

 

So my investment decision in BRK is not built on the back of the Wizard of Omaha's future decision making. It's built on his diligent commitment to value investing in the past, his diligence in establishing a diligent management team which embodies his general principles with perhaps some affluence to the changing climate of the world (perhaps a bit out of WB's circle of competence).

 

I liken WB to a highly respected surgeon that is now in his 70's. Clearly respectable and renown. But unlikely to learn new methods and approaches. That's not to say he wont complete some miraculous surgeries near the end of his career to the best of his ability. It's simply he isn't likely to view surgeries in a new light with new methods which could potentially give better results maybe in a less invasive, quicker recovery type manner.

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This part of what you mentioned Castanza is interesting:

 

an under performance in the short term is insignificant to me in the long term

 

I am similar age to you early 30's.  However, Berkshire has underperformed for a pretty long time---I believe the past 10 or so years.  If you think that underperformance continues for another 5-7 years we are at 15 years of underperformance.  Just to get back to even with VFIAX or something is no easy chore.  I am long Berkshire because I believe that it is undervalued today and things will be done sooner rather than later. Some things that come to mind off hand are buybacks and making an acquisition.

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Can we take this back to the specific topic thread of VALUATION

 

I have Fair Value pegged at $260 - $280 currently.  Would love to know what others think around valuation.  It seems like the Street is giving little credit for the Operating Income at the parent company more broadly. 

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I think fair value is around 230-240 per share.  A couple of reasons I don't have a number closer to Value Maven's:

1. Heavy cash balance-This only really helps if recession is much longer than people except.

2. Buffett's inactivity-Heavily covered.  I won't reiterate.

3. Buffett's inability of unwillingness to do buybacks at a bigger scale.  One thing Buffett has said many times is we could move fast or make a deal quickly.  Well he had the opportunity to snatch up shares around 160/170 and didn't.  Now they have spent most of this quarter around 180---we'll see if he did anything. 

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Guest longinvestor

For those mentioning precision railroading post WEB, you're assuming the BNSF management wanted to implement it but Buffett stopped them? I am having trouble believing that because Buffett is generally very hands off. So why would he get involved for this?

 

Maybe BNSF has a better reason not to do it, or maybe they wanted to wait it out to see how it affects customers in the rest of the industry?

 

I believe that is the reason given during the 2019 annual meeting. PSR is fancy jargon used by the RR majors for effing their customers.

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I think focusing on the potential downside in Berkshires valuation is a good way of thinking about it’s attractiveness today. It is unlikely that Berkshires book value will be lower in five years, and that it will also be selling at a price to book that is lower than it is today. Between 2004 - 2019 Berkshire grew it BV/ share by an average of roughly 80% over every 5 year period. During this time there has never been a 5 year period where BRK’s BV/ share has declined. Berkshire also sold at an average Price to Book of about 1.3 between the years 2013 & 2019. Warren has publicly stated that this is an attractive P/B from a valuation standpoint. To add to this point, as BRK’s fully owned businesses continue to grow the P/B BRK should be selling for should continue to grow as well. It would be reasonable to expect BRK to sell at a P/B greater in 5 years than it has typically sold in the past. Berkshire has a ton of cash, employs some amazing people, and owns many diverse businesses that provide useful & necessary services to people around the globe. Berkshire seems to me a safe place to protect your downside, and to likely make an acceptable return as well.

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This part of what you mentioned Castanza is interesting:

 

an under performance in the short term is insignificant to me in the long term

 

I am similar age to you early 30's.  However, Berkshire has underperformed for a pretty long time---I believe the past 10 or so years.  If you think that underperformance continues for another 5-7 years we are at 15 years of underperformance.  Just to get back to even with VFIAX or something is no easy chore.  I am long Berkshire because I believe that it is undervalued today and things will be done sooner rather than later. Some things that come to mind off hand are buybacks and making an acquisition.

 

Can we move this topic to the general news?  Or new topic?  I was looking for discussion on this, what to do with BRK now, with expectation that transition sometime in future, and what that transition means, risks, rewards, etc.  I'm very curious to see what folks here think.  Part of it is that I am so completely unsure of BRK in the future without Buffett, that I've been stopping myself from adding.

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At the end of 2019 my model assumed "normal" BRK.B look through earnings of $12 to $16 per share, and a growth rate of 6% to 8% (a base case of $14 per share look through earnings and 7% growth).

 

Since then I've impaired my estimates to incorporate post-covid margin compression for financials, and more modest growth expectations.

 

I now model for look through earnings of $8 to $12 per share, and growth of 5% to 7% (a base case of $10 per share and 6% growth).

 

For me, intrinsic value falls somewhere in the neighborhood of $240 per B share. I'm perfectly comfortable owning the stock at the current price, and would happily buy more below $160 per share.

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For those mentioning precision railroading post WEB, you're assuming the BNSF management wanted to implement it but Buffett stopped them? I am having trouble believing that because Buffett is generally very hands off. So why would he get involved for this?

 

Maybe BNSF has a better reason not to do it, or maybe they wanted to wait it out to see how it affects customers in the rest of the industry?

 

I believe that is the reason given during the 2019 annual meeting. PSR is fancy jargon used by the RR majors for effing their customers.

 

I think there's a balance there. The idea of scheduling trains to run at a specific time vs whenever the customer wants is probably less convenient for the customers, but seems fair.

 

I dont expect the common carrier airlines to fly whenever its convenient for me. I either fly on their schedule or pay to fly privately.

 

Railroads also have historically had a bunch of unnecessary costs in the system. As an example, Hunter Harrison moved most of CP HQ staff from expensive downtown office space to a building they already owned at the rail yards.

 

I think the kindly neighbour vibe (from both WEB and the BNSF management) is ok, but there is some level of profit maximizing that is appropriate as well.

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At the end of 2019 my model assumed "normal" BRK.B look through earnings of $12 to $16 per share, and a growth rate of 6% to 8% (a base case of $14 per share look through earnings and 7% growth).

 

Since then I've impaired my estimates to incorporate post-covid margin compression for financials, and more modest growth expectations.

 

I now model for look through earnings of $8 to $12 per share, and growth of 5% to 7% (a base case of $10 per share and 6% growth).

 

For me, intrinsic value falls somewhere in the neighborhood of $240 per B share. I'm perfectly comfortable owning the stock at the current price, and would happily buy more below $160 per share.

 

Thanks for laying out the assumptions. Without knowing one's estimates of earnings, growth rate of earnings and discount rate, it is difficult to know where there is disagreement if any.

 

In the base case as of Q1, 2020, I have normalized earnings as $12.5 per share, excluding any earnings from float. Growth rate of 8.5%.

 

To me, it looks like any differences in IV estimates for BRK really boil down to

 

1) The value of float. This is harder to assess as it is dependent on interest rates and investment opportunities. One simple and likely very conservative way is to assume that $60-80 billion would always remain in cash and as long term interest rates may remain low for a long time, essentially are not worth much. So we end up valuing the rest of the float or about $50 billion.

 

Or assume it is going to earn some low rate on the total float and it ends up adding $0.5 to $1 per share.

 

2) The discount rate.

 

So you have ROE of about 8.5% which is consistent with the growth rate assumption as well with 100% earnings retention.

 

If you pick a discount rate of 7%, you have to have to look through 30 years to make it worth 1.5x book value.

 

The question I have for you is, if you assume a growth rate of 6%, why would it be worth even book value unless your discount rate is less than 6%?

 

Vinod

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